EBF advisor: Olivier Thomas
Publication date: 24 October 2016
The European Banking Federation welcomes the opportunity to respond to the European Commission’s consultation regarding the comprehensive revision of the EU MacroPrudential policy framework. Firstly, European banks noted that the experience on macro-prudential instruments is very limited given the nature of risks that are being addressed by them. Economic cycles are by nature long and unpredictable, namely in Southern European countries, the economic recovery after the recession remains feeble hence not giving the opportunity to use and properly assess the level of adequacy of such instruments.
In addition, the SREP framework is constructed in a way that makes it difficult to identify and isolate significant overlaps that may exist as competent authorities (CAs) can always resort to Pillar 2 requirements to address systemic risks (especially for institutions of systemic relevance). Furthermore, the macro prudential use of Pillar 2 is not subject to the type of harmonization that is trying to be applied to Macro-prudential instruments, thus giving greater discretion to CAs for their use.
Until now the macro-prudential instruments acted mainly by means of an add-on to the regular capital/liquidity requirements, reflecting a perspective of tighter conditions to avoid future cyclical bursts, in parallel with the existing SIFI requirements that are addressing structural risks.
In our opinion, for such perspective to be right, the current capital requirements need to be seen as cyclically low, so that when the economic cycle is improving, tighter requirements are set and consequently in the event of a downturn period they will be eased accordingly.